Articles 8th Mar 2024

PMLA and IBC: Striking a Pragmatic Balance

Authors

Mukesh Chand Senior Counsel | Mumbai

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  • The intertwining domains of the Prevention of Money Laundering Act, 2002 (PMLA), and the Insolvency and Bankruptcy Code, 2016 (IBC) add to India’s complex legal landscape. While PMLA aims to combat money laundering and terrorist financing, IBC focuses on the resolution of corporate insolvency. This article provides a detailed analysis of the PMLA’s provisions and advocates for a practical approach by PMLA authorities in handling cases with charged assets. It also examines Section 32A of the IBC, offering insights into the ongoing liabilities of promoters and directors charged with PMLA offenses.

  • Understanding the PMLA: Provisions, Objectives, and Powers

    Provisions of the PMLA

    The PMLA, in its substantive provisions, criminalizes money laundering and provides a framework for the investigation, prosecution, and confiscation of the proceeds of crime. The Act encompasses various offenses related to financial transactions and provides a comprehensive mechanism for the attachment and confiscation of tainted assets.

    Objectives of PMLA

    The primary objective of the PMLA is explicitly outlined in its long title: “An Act to prevent money-laundering and to provide for the confiscation of property derived from, or involved in, money-laundering.” The focus is on securing the integrity of the financial system by curbing illicit financial activities and dismantling the intricate web of money laundering.

    PMLA casts a wide net over various offenses to combat the intricate web of money laundering. Encompassing a broad spectrum, the Act includes offenses under the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, the Unlawful Activities (Prevention) Act, and several others. This expansive approach ensures that the legislation addresses a multitude of criminal activities, such as terrorism, drug trafficking, human trafficking, and corruption, that contribute to the menace of money laundering.

    Powers of Authorities under PMLA

    The Enforcement Directorate (ED), as the designated authority under PMLA, is vested with extensive powers. These powers include the authority to conduct investigations, attach properties, and initiate proceedings for the confiscation of proceeds derived from money laundering activities. The far-reaching powers of ED underscore the seriousness with which the legislature addresses the issue of money laundering.

    The PMLA equips authorities with extensive powers to investigate and seize assets linked to money-laundering activities. Section 5 of the Act provides authorities with the capability to seize properties related to money laundering investigations. Importantly, the Act creates a legal presumption in Section 24 that, in any proceedings relating to proceeds of crime, unless proven otherwise, the assets are presumed to be involved in money laundering. This places a significant burden on the accused and anyone in possession of the proceeds of crime.

    Furthermore, Section 8 of the PMLA grants enforcement agencies, such as the Directorate of Enforcement, the power of arrest, attachment, search, and seizure of property when there is evidence of wrongdoing by the owners. While affirming the legality of Section 8 in a recent verdict, the Supreme Court expressed concern about the wide interpretation, cautioning against arbitrary applications. This power, combined with the presumption created by Section 24, establishes a formidable mechanism for authorities to investigate and confiscate assets acquired from the proceeds of crime.

  • Need for a Pragmatic Approach by PMLA Authorities: Charged Assets and Public Purpose

    While the PMLA is a potent weapon against financial crimes, it becomes imperative for authorities to adopt a pragmatic approach, especially when assets are charged to banks and insolvency resolution is pursued under the IBC. In cases where securities are available to banks, the public purpose is served by the orderly resolution of insolvency, ensuring continuity in business operations, job protection, and economic stability.

  • Public Purpose and Resolution under IBC

    Objective and Features of IBC

    Different to  PMLA, the Insolvency and Bankruptcy Code, 2016, operates within the domain of insolvency, bankruptcy, and the rehabilitation of financially distressed entities. The foundational objectives of the IBC include reorganizing and resolving insolvency cases in a time-bound manner. It seeks to maximize the value of assets, promote entrepreneurship, ensure the availability of credit, and balance the interests of various stakeholders.

    One of the key reforms introduced by the IBC is the shift in power dynamics from debtor to creditor. By prioritizing the resolution of debtors, the Code aims to instil fiscal and credit discipline, providing a structured and efficient framework for addressing insolvency issues. The IBC serves as a critical building block for India’s progression towards a mature market economy, addressing the need for a comprehensive law effective in resolving insolvency, maximizing asset value and facilitating the closure of unviable businesses.

    The clash between the IBC and PMLA comes to the forefront when contrasting claims are pressed against common properties. This often involves secured creditors, who hold legitimate charges on assets, conflicting with enforcement agencies under the PMLA seeking to implement provisions related to money laundering. The conflict intensifies when assets are financed by lenders, and PMLA authorities aim to seize them based on alleged offenses committed by the owner, falling under the purview of PMLA-listed offenses.

    Issues also arise from the moratorium imposed by the IBC through Section 14, which protects the corporate debtor during the Corporate Insolvency Resolution Process (CIRP). This stands in opposition to PMLA’s objective to confiscate assets involved in money laundering, creating a complex legal landscape. Section 32A of the IBC adds another layer by explicitly shielding the corporate debtor from further prosecution for offenses committed before the commencement of the insolvency resolution process, once the resolution plan is approved.

     Recent Judgments and Perspectives

    The recent judgment by the Bombay High Court[1], placing emphasis on Section 32A of the IBC, marks a pivotal development. This section acts as a shield, protecting the corporate debtor from further prosecution once the resolution plan is approved, ensuring a clean slate for the entity post-insolvency resolution.

    Several courts have consistently ruled in favor of the IBC in conflicts between the two legislations, emphasizing the non-obstante provision of the IBC, echoed by PMLA’s Section 71. This suggests a legal hierarchy where the provisions of the PMLA are to apply notwithstanding any conflicting or overlapping provisions of other existing legislation.

    The Judgment of Single Judge of Delhi High Court in the case of Rajiv Chakraborty RP of EIEL Vs Directorate of Enforcement[2] present a fine understanding of provisions of the two enactments. It presented a different aspect of interplay between the two enactments and relied  on the judgment of Nitin Jain Liquidator PSL Ltd. v. Directorate of Enforcement[3]. In this matter it was held that no action can be taken against the properties of corporate debtor in respect of offences committed prior to commencement of corporate insolvency resolution process (CIRP).  Once the resolution plan comes to be approved or when sale of liquidation starts taking place, the process of resolution or liquidation must be taken forward unhindered. This interpretation of Section 32-A is in the larger interest of all the stakeholders. It is the imperative especially in the context of  attracting resolution applicants who would otherwise be shy and not forthcoming if penalties arising out of offences are to affect the corporate debtor.

    Further, relying upon on the judgment of Biswanath Bhattacharya v. Union of India[4] of the Supreme Court, it was held that powers of the attachment which stand comprised under Sections 5, 6 and 8 are basically adoptions of principles of civil forfeiture.  The legislative intent of which is that perpetrators of money laundering offences do not enjoy the fruits thereof. The attachment of property under Section 5 of the PMLA is an aspect of civil forfeiture permissible and available to the sovereign when property is illegally acquired. There is no right to enjoy property that is derived from unlawful conduct and thus the non-conviction-based asset forfeiture model is an internationally accepted practice in the fight against organised crime and money laundering. In the judgment of Directorate of Enforcement v. Axis Bank[5], it was held that there is no conflict between the provisions of PMLA and IBC.  A third party who is a bona fide purchaser can always approach the adjudicating authority seeking release of the attached property by showing that interest in the property is d bona fide, for lawful and adequate consideration.

    As regards the applicability of moratorium, it was clarified that the word “proceedings” under Section 7 shall imply those proceedings, that are relatable to enforcement or recovery of a debt owed by the corporate debtor. It cannot extend to criminal/quasi-criminal proceedings pertaining to “proceeds of crime” or the tainted property derived illegitimately from criminal activities. Thus, moratorium order under Section 7 of the IBC cannot prevent the authorities under PMLA from exercising powers conferred by Sections 5 and 8 notwithstanding the pendency of CIRP.

    Pragmatism in PMLA Enforcement

    However, PMLA Authorities must recognize the pragmatic reality that insolvency proceedings under the IBC are not designed to shield individuals from legitimate actions arising out of financial crimes. Instead, they provide a structured mechanism for the resolution of distressed entities. Charging assets to banks enhances the chances of successful resolution, ensuring that the financial system remains robust.

  • Section 32A of IBC: Continued Liabilities and Protection

    Section 32A of IBC

    Section 32A, introduced w.e.f 28.12.2019, assumes significance in the context of conflicts with PMLA. This section provides protection to the corporate debtor and its assets from actions under any other law, including PMLA. However, it explicitly carves out exceptions for continued liabilities in cases where promoters and directors were involved in offenses covered under the PMLA. While Section 32A shields the corporate debtor from post-resolution actions, it preserves the liability of promoters and directors implicated in PMLA offenses. This nuanced approach ensures that wrongdoers face consequences, aligning with the overarching goal of deterring financial crimes. The constitutional validity of Section 32A was upheld by the Supreme Court of India in the matter of Manish Kumar vs. Union of India (2021).

  • Other Judicial Pronouncements

    While the conflict appears evident, potential resolutions lie in allowing PMLA authorities to exercise discretion based on the validity of charges held by lenders. This pragmatic approach would acknowledge the rights of secured creditors and direct PMLA interventions towards assets genuinely acquired from the proceeds of crime. Such a balanced strategy could prevent undue hardship to lenders while ensuring that the objectives of the PMLA are not compromised.

    The legal saga began with the NCLAT’s decision in Rotomac Global Private Limited vs. Deputy Director[6], where it reiterated the stance from Varrsana Ispat Limited[7] regarding protection of Section 14 IBC where assets were attached much before CIRP. The NCLAT observed that “As the ‘Prevention of Money Laundering Act, 2002‘ relates to different fields of penal action of ‘proceeds of crime’, it invokes simultaneously with the ‘I&B Code’, having no overriding effect of one Act over the Company Appeal (AT) (Insolvency) No. 140 of 2019 other including the ‘I&B Code’, we find no merit in this appeal. It is accordingly dismissed. No costs.” The case of the Appellant being covered by ‘Varrsana Ispat Limited’ (Supra), the present appeal is dismissed.”

    However, a dissenting note emerged in Directorate of Enforcement v. Manoj Kumar Agarwal[8], suggesting that PMLA actions might be impermissible post-moratorium under IBC. It was held that ‘there is no conflict between PMLA and IBC and even if a property has been attached in the PMLA which is belonging to the Corporate Debtor, if CIRP is initiated, the property should become available to fulfil objects of IBC till a resolution takes place or sale of liquidation asset occurs in terms of Section 32A’. This discord was resolved by a larger NCLAT bench in Kiran Shah[9], where it was held that “this ‘Tribunal’ makes it candidly clear that filing of Application under Section 60(5) of the I & B Code is not an ‘all pervasive’ one, thereby conferring ‘Jurisdiction’ to an ‘Adjudicating Authority’ (NCLT) to determine ‘any question/issue of priorities’, question of Law or Facts pertaining to the ‘Corporate Debtor’ when in reality in ‘Law’, the ‘Adjudicating Authority’ (NCLT) is not empowered to deal with the matters falling under the purview of another authority under PMLA” and as regards the decision in Manoj Kumar Aggarwal case it was held that “this ‘Tribunal’ is of the considered opinion that the said decision runs contra to the ‘Principle of Stare Decisis.

    The Delhi High Court judgment in the Rajiv Chakraborty case, underscores the divergence in objectives between PMLA and IBC. It emphasized that the primary goal of an IBC moratorium is to maximize the value and preserve the corporate debtor’s assets during the resolution process, preventing creditor interference. In contrast, PMLA aims at disgorging illicit gains and combatting financial crime. The court firmly rejected any subordination of PMLA to the IBC moratorium, asserting their distinct purposes.

    The court further clarified that the government, when acting under PMLA, does not function as a creditor seeking to enforce a debt. Instead, it acts to strip wrongdoers of their right to enjoy ill-gotten gains. This aligns with previous decisions, such as Directorate of Enforcement v. Axis Bank and P. Mohanraj v. Shah Bros. Ispat,reinforcing the view that PMLA operates independently of IBC. The court also tackled the interplay between Section 32A of IBC and PMLA. It clarified that Section 32A’s immunity from prosecution applies only after the approval of a resolution plan or liquidation, marking the defining moment for its operation. This distinction was crucial to understanding when IBC’s shield against prosecution comes into play.

    The conflict between IBC and PMLA has also been the subject of deliberations in other fields too, each providing insights into the complex interplay of these statutes. One notable case is Kohinoor Creations v. Syndicate Bank[10] where the Delhi High Court held that the non-obstante clause in the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDB Act) prevails over conflicting provisions in the Arbitration and Conciliation Act, 1996. This establishes a precedent that a later-enacted statute with a non-obstante clause takes precedence.

    In PR Commissioner of Income Tax v. Monnet Ispat & Energy Limited[11], the Supreme Court reinforced the supremacy of IBC, asserting its authority over inconsistent provisions in other statutes. Crown debts, such as income-tax dues, were deemed subordinate to debts payable to secured creditors under the IBC. This further affirms the IBC’s dominance over conflicting provisions in different laws.

    The Assistant Commissioner (CT) v. Indian Overseas Bank[12] case, decided by the Madras High Court, supports the idea that during the moratorium period, debts owed to secured financial creditors shall take priority over other dues payable to the government under the IBC. This reinforces the prioritization of debts to secured financial creditors during the moratorium.

    The specific provision of Section 63 of IBC is crucial in understanding the conflict. It ousts the jurisdiction of adjudicating authorities under the PMLA, emphasizing that NCLT’s jurisdiction under IBC for debt recovery actions supersedes the jurisdiction of the adjudicating authority under PMLA.

    The interplay of various judgments on PMLA and IBC, such as Rajiv Chakraborty, Varrsana Ispat Limited Vs. Deputy Director and Directorate of Enforcement Vs. Sh. Manoj Kumar Agarwal, suggests that IBC and PMLA can coexist, with IBC taking precedence during Corporate Insolvency Resolution Process (CIRP). These cases highlight specific scenarios, such as attachments made prior to CIRP not benefiting from Section 14 of IBC.

    In the case of Punjab National Bank vs. The Deputy Director, NCLAT held that “In view of the non-obstante clause contained in Section 238 of IBC, the Adjudicating Authority under the PMLA could not have continued with the attachment after declaration of moratorium. The non-obstante clause contained in IBC, which is a later statute shall prevail over the non-obstante clause contained in Section 71 of PMLA”.

    In the Case of Punjab National Bank Vs The Deputy Director, Directorate of Enforcement, Raipur[13] the Appellate Authority for SAFEMA, FEMA, PMLA, NDPS, PBPT ACT, held that “by virtue of conjoint effect of Sections 31B and 26E of The Recovery of Debts and Bankruptcy Act, 1993 and The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the secured creditor i.e. Appellant herein (Punjab National Bank) shall have priority to the secured asset to satisfy their respective dues which shall prevail over and supersede the other debts government dues, revenues, taxes, cesses and rates due to the Central Government, State Government and local authorities”.

    In Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd[14] ((2001) 3 SCC 71), the Supreme Court had settled the law that if a non-obstante clause is contained in two enactments, the non-obstante clause in the later enactment shall prevail over the non-obstante clause in the earlier enactment.

    Vanpic Ports (P) Ltd. v. Directorate of Enforcement[15] emphasizes the need for proper reasons to believe in attachment orders under PMLA. The court clarifies that PMLA and IBC can coexist, with Section 32A of IBC taking precedence.

    In its judgments Anil Vasantrao Deshmukh v. State of Maharashtra[16] and Lakhwinder Singh v. Union of India[17] there is emphasis on the strict interpretation of “proceeds of crime” and its inextricable link to criminal activity.

    JSW Steel Ltd. vs. Mahendra Kumar Khandelwal[18] clarifies that upon approval of a resolution plan, it becomes binding on all stakeholders, including government agencies. The new management is not liable for offenses committed by the previous management.

    The Gujarat High Court in the matter of Am Mining India Pvt Ltd vs. Union of India[19] concluded that Section 32A of the IBC governs the operation and excludes the operation of PMLA, granting protection under IBC that overrides the power of ED to attach properties under PMLA.

  • Conclusion

    In summary, these judgments collectively suggest that IBC, particularly Section 32A, holds primacy over conflicting provisions in PMLA. The courts consistently emphasize the need for a strict interpretation of “proceeds of crime” and a clear link to criminal activity.

    The apparent conflict between the IBC and PMLA, often manifesting during insolvency processes, calls for a careful balance between protecting the rights of creditors and preventing money laundering. Recent judgments suggest a harmonious interpretation is possible, recognizing the importance of Section 32A in shielding corporate debtors. The conflicting judgments underscore the need for a nuanced approach, avoiding an outright clash and striving for a harmonious coexistence. The Supreme Court, in the case of Manish Kumar vs. Union of India, upheld the constitutional validity of Section 32A, emphasizing its role in achieving resolution without burdening resolution applicants with additional liabilities.

    A pragmatic and collaborative approach, where PMLA authorities consider valid charges and substantial evidence of criminal proceeds, could provide a practical resolution to this legal conundrum. By acknowledging the global nature of money laundering and the need for international cooperation, a nuanced understanding of the assets involved could pave the way for a more cohesive application of both legislations.

    PMLA is a potent weapon against financial crimes, but there is need to adopt a pragmatic approach, especially when assets are charged to banks and insolvency resolution is pursued under the IBC. In cases where securities are available to banks, the public purpose is served by the orderly resolution of insolvency, ensuring continuity in business operations, job protection, and economic stability.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com

  • References

    [1] WP (L) NO.9943 OF 2023- Shiv Charan & Ors Vs Adjudicating Authority under PMLA- Bombay High Court- Decided on 09.01.2024
    [2] 2022 SCC OnLine Del 3703.
    [3] 2021 SCC OnLine Del 5281.
    [4] (2014) 4 SCC 392.
    [5] 2019 SCC OnLine Del 7854.
    [6] Company Appeal (AT) (Insolvency) No. 140 of 2019 decided by NCLAT on 02.07.2019
    [7] Company Appeal (AT) (Insolvency) No. 493 of 2018- Decided by NCLAT on 02.05.2019
    [8] Company Appeal (AT)(INSOLVENCY) NO.575/2019- Decided by NCLAT on 09.04.2021
    [9] Company Appeal (AT)(Insolvency) No. 817 of 2021Decided by three Member of NCLAT on 03.01.2022
    [10] Kohinoor Creations And Ors. vs Syndicate Bank – Delhi High Court – Decided on 26.05. 2005
    [11]  Pr. Commissioner of Income Tax Vs Monnet Ispat and Energy Ltd – Supreme Court Decided on 10.08.2018
    [12] Assistant Commissioner (CT) v. Indian Overseas Bank- Madras High Court- Decided on 10.11.2016
    [13] FPA-PMLA-2633/RP/2018 Decided on 02.01.2019.
    [14] Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd ((2001) 3 SCC 71
    [15] CMSA No 6 of 2020 decided by Telangana High Court on 27.09.2022
    [16] BA 1021 or 2022 – Decided by the Bombay High Court on 04.10.2022
    [17] 2022 SCC Online HP 6166.
    [18] Company Appeal (AT) (Insolvency) No. 957 of 2019 Decided by NCLAT (matter before the Supreme Court)
    [19] Am Mining India Pvt Ltd vs. Union of India – Gujarat High Court – R/Special Civil Application No. 808 of 2023

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.